Australian banks now have proportionally more higher risk property loans than before the GFC, according to analysis of Australian Prudential Regulation Authority (APRA) data by Moody’s Investors Service.
“The increase in higher-risk lending is credit negative for Australian banks because it weakens the credit quality of their portfolios,” says Ilya Serov, Moody’s Vice President and Senior Credit Officer.
The latest APRA statistics on exposure to residential property shows an increase in the proportion of higher-risk loans underwritten by Australian banks, including investment loans, interest-only loans and loans written outside normal serviceability criteria.
This chart shows the rise of high brisk loans:
The negative developments during the June quarter:
- The proportion of investment loans against all new loans rose to 37.9% compared with a 2008-14 average of 32.6%.
- Over the past 12 months, the total value of outstanding mortgages to investors increased by 10.9%, versus a 7.5% growth rate for loans provided to owner-occupiers.
- The proportion of newly written interest only loans rose to 43.2% in the quarter, and now comprises 35.7% of all outstanding loans, the highest percentage on record.
- The proportion of loans approved outside normal serviceability criteria – where the lender makes an exception to its policy – rose to 3.7%, again the highest in ARPA’s 2008-14 sample.
“Although investment and interest only loans performed well during the global financial crisis, they inherently carry higher default probabilities and severities, and a larger proportion of such loans risks leading to higher delinquency levels for Australian banks at times of stress,” says Moody’s.
Investment loans typically have higher loan-to-value ratios.
Moody’s calculates that the average loan-to-value for investment loans is 60.2%, versus 57.8% for owner-occupier loans.
“Since the underlying properties are not the primary residence, they are more sensitive to changes in house prices and borrower employment status and thus are more likely to default if the borrower’s conditions change,” Moody’s says.
Interest only loans are more exposed to rising interest rates than principal-and-interest loans.
“Our expectation that interest rates in Australia will rise over the next 18 months means there is an increased likelihood of a payment shock for these borrowers,” Moody’s says.
APRA has recently focused on curbing higher-risk lending, particularly high loan-to-value loans.
The proportion of loans with a loan-to-value of more than 90% has declined to 12.5% as of June 2014 from 14.0% in 2013.
However, Moody’s says the higher proportion of investment and interest only lending suggests that APRA’s efforts have not slowed a broad increase in higher-risk exposures.
“Higher-risk lending is particularly negative for banks whose credit growth has significantly outpaced system growth,” Moody’s says.
“Rapid increases in the size of the loan book may come at the expense of lending standards, or otherwise put pressure on the banks’ risk controls.”
Banks classified by APRA as “other domestic banks”, including the Bank of Queensland Limited, Bendigo and Adelaide Bank Limited and Suncorp-Metway Ltd, as well as Macquarie Bank, recorded notable increases in credit growth.
Australia’s non-conforming residential mortgage backed securities (RMBS) market has also re-emerged after stalling during the GFC.